Chapter 7’s Treatment of Secured Debts

A Chapter 7, sometimes called “straight bankruptcy,” provides you with a number of important advantages with your secured debts. Those are debts in which your obligation to pay is secured by collateral, specifically by certain rights that the creditor has over your collateral. If you do not stay current on the agreed payments on the debt, the creditor can usually take that collateral from you.

Stopping Repossessions and Foreclosures

The filing of any kind of bankruptcy—including Chapter 7—imposes the “automatic stay” on all your creditors. This immediately stops all attempts by your secured creditors to take possession or ownership of the collateral. It not only prevents them from acting against assets in which they already have a lien, the automatic stay also stops unsecured creditors from becoming secured ones, such as by stopping lawsuits from turning into judgments.
“Reaffirmation”

If you are current on your secured debt and want to keep the collateral, under Chapter 7 you can almost always do this. Sometimes people are concern that if they file a bankruptcy case they will not be permitted to keep making payments on a vehicle or home. But the reality is that a very legitimate reason to file a Chapter 7 case is to discharge (legally write off) unsecured debts in order to be able to afford to make your vehicle or home payments.

If you do want to keep on making payments on a secured debt, you will generally need to sign a formal “reaffirmation agreement.” As it sounds, with this agreement you are saying that in spite of filing bankruptcy this is a debt that you want to continue being legally liable for. Why do you need to sign this document agreeing to pay for a debt that you’d already agreed to pay in the first place? Because your bankruptcy discharge order, which legally writes off your debts, would otherwise write off this obligation as well. A reaffirmation agreement excludes the reaffirmed debt from that discharge, because you want to keep the collateral.

Surrendering Collateral

Chapter 7 gives you the very important option of giving up the collateral to the creditor to get out of your obligation to pay the underlying debt. This is for situations in which you do not need or want the collateral any more, or just can’t afford to make the payments. This is an important option because surrendering collateral usually doesn’t make financial sense outside bankruptcy because of the likely “deficiency balance” that you would usually owe. That’s the remaining balance on a secured debt after the collateral is surrendered. It comes from the creditor selling the collateral, often at an auction, usually for less than the balance, and then adding the auction costs and other fees, the final amount owed being the “deficiency balance.” In a Chapter 7 case that balance is discharged, making surrender a much more sensible option.

If you are trying to figure out whether you should keep or surrender collateral, I would be happy to review you debts and advise you about your legal alternatives. At the office of bankruptcy attorney Carrie Weir, in Rockwall, Texas, I provide a free initial consultation to anyone with questions or concerns regarding a bankruptcy filing. Please reach me at my office by using the contact form here or by calling me at 972-772-3083 to arrange a private meeting. I represent clients in Rockwall, Heath, Greenville, Lavon, Wylie, Mesquite and Rowlett.